Issue

Nano’s all dressed up with nowhere to go

03/01/2006

VC funding hits high but no IPO party yet

By David Forman

U.S. private equity investors put a record amount of money into nanotechnology companies in 2005, but they likely won’t see the kind of IPO market that would let them cash in on their investments until late 2006 or 2007.

Nanotechnology funding reached $434.3 million in 2005, up 121 percent over the $196.4 million invested in 2004 and well over the previous record of $301 million invested in 2003, according to a Small Times analysis of the MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. The average deal size was $8.5 million.

However, the actual number of deals that took place during 2005 increased only slightly, from 45 in 2004 to 51 in 2005. While the six extra deals contributed to the funding total, the primary reason for the boost was an increase in the later stage funding of startups founded two, three and four years ago.

There were 20 nano deals during the year worth $10 million or more, six of them for $20 million or more. Nanosys captured the year’s biggest round, with $40 million, followed by a $35 million round for Nano-Tex and a $30 million round for Aspen Aerogels.

California companies raised the lion’s share of nano funding in 2005, with 19 rounds worth a total of $235.8 million. Massachusetts was a distant second, with eight rounds worth $81.2 million. Texas had the third most activity of the states, with four rounds worth $27.8 million.

Small Times has a partnership with PricewaterhouseCoopers under which it performs a quarterly analysis of the MoneyTree survey for the purposes of tracking funding in nanotechnology as well as the broader category of “small tech,” which includes nanotechnology, MEMS and microsystems. Research by David Forman.

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On an industry basis, the leading category for nano-related investing in 2005 was the industrial/energy category, which attracted $146.5 million in 13 deals. Companies developing nano approaches to solar energy conversion were popular, as HelioVolt, Solaris Nanosciences, Konarka Technologies, Miasole and Nanosolar all raised funds during the year.

On a deal basis, both biotechnology ($53 million) and semiconductors ($66.6 million) were responsible for 11 deals each, though the electronics and instrumentation category’s eight deals accounted for more money: $86.1 million. The categories of computers and peripherals, medical devices and equipment, and networking and equipment accounted for the rest of nanotech investing activity.

Despite the uptick in activity and a smattering of nanotech-related IPOs in 2005, the sector’s longing for a blockbuster IPO remains unrequited.

Last year saw Oxonica go public on London’s Alternative Investment Market (AIM) and Nucryst Pharmaceuticals float shares on the Nasdaq. However, Oxonica, an English company commercializing nanomaterials in a variety of markets, raised slightly more than $12 million - a decent fund raising, but hardly an exit opportunity for prior investors.

And while Nucryst, a Massachusetts company that makes wound care products using nanocrystalline silver, raised close to $40 million, the public offering was a partial spinoff of a corporate subsidiary rather than the IPO of a venture-backed startup.

The July IPOs on the AIM by Oxonica and Mountain View, Calif.’s Polyfuel put London’s junior market on the radar screen of panelists at the Nanotech Investing Forum held Jan. 31 and Feb. 1 in Palm Springs, Calif. Members of a panel on the IPO market debated whether the Nasdaq or the AIM would be the center of attention in 2006, but they mostly agreed on what the year’s activity would look like: Four out of five said the year would see somewhere between two and four nano-related IPOs, but that the sector wasn’t likely to really heat up until at least the end of the year, if not 2007.